Estimating Federal BHP Funding Levels

Our suggested approach

As explained earlier, the methodology for calculating actual federal BHP payments relies on determining a reference premium for each county in the state and applying it to each county’s BHP enrollees. The approach we suggest to projecting federal BHP payments simplifies this process by calculating a statewide reference premium and applying it to estimates of the statewide BHP-eligible population.

As the first step in our proposed process, one averages the premium for the second-lowest-cost silver plans among the state’s counties, weighted in proportion to the number of silver-plan enrollees or subsidized QHP enrollees in each county. The averages reflect non-smoker premium quotes for single adult enrollees of a particular age, such as 21-year-olds. The state’s rating rules allow a derivation of premiums for other ages and for coverage of more than one person per household.1

In step two, one uses the statewide benchmark premium to build statewide federal payment cells. Each cell shows what the federal government would pay for BHP enrollees of the applicable age range, FPL range, household size, and number of BHP-eligible consumers per household, assuming the statewide reference premium.

In step three, one calculates the average federal payment per BHP-eligible consumer, using the estimates in appendix Table A4 showing the number of BHP-eligible consumers who are within each statewide federal payment cell. To obtain the average, one: (1) multiplies the federal payment amount in each cell by the number of eligible consumers in that cell and (2) divides the total by the number of BHP-eligible consumers in the state. The results also allow a determination of average federal payments per BHP-eligible consumers within various sub-populations, such as those with incomes or ages in various ranges.

An illustrative example: Washington State

Here, we show how the above method is used to find that federal payments for BHP-eligible residents in Washington State will average approximately $4,366 for 2015.2

Step One: Determine the weighted average benchmark premium

For the Washington illustration, we begin by calculating the weighted average “benchmark” premium—that is, the second-lowest-cost silver plan offered in Washington’s marketplace—for 21-year-old non-smokers. Table 1 shows 2014 premiums and total enrollment for the benchmark plan in each Washington county.

We average the county-specific premiums in proportion to each county’s QHP enrollment. As a result, we find a weighted average benchmark premium for 21-year-old non-smokers of $222.86 a month in 2014.5 According to the Washington State Office of the Insurance Commissioner, weighted average QHP rates are expected to rise approximately 8.25% from 2014 to 2015.6 To estimate federal BHP payments for 2015, we therefore use a weighted-average benchmark premium of $241.25 for 21-year-old non-smokers, which is 8.25% above the 2014 level.

Step Two: Construct federal payment cells

After calculating the weighted average benchmark premium, or “reference premium,” for 21-year-old non-smokers in 2015, we construct federal payment cells by developing two components for each relevant combination of age range, FPL, household size, and number of BHP-eligible consumers per household: the PTC component and the CSR component of the federal BHP payment.

Premium Tax Credit Component

Premiums by age

In moving from the reference premium for 21-year-old non-smokers to the PTC component of federal BHP payments, the first step requires estimating the reference premiums that would be charged to BHP-eligible consumers of other ages. Like most states, Washington varies premiums by age using the so-called “HHS Default Standard Age Curve.”7 We apply the ratios of that curve to the $241.25 premium for 21-year-old non-smokers to derive the reference premiums for adults of other ages, as shown in Table 2.

Source: CCIIO 2014. Note: The Premium Ratio is taken from the HHS Default Standard Age Curve.

As noted above, the federal payment methodology assumes an even distribution by age within each age range used to define federal payment cells. We apply that averaging methodology in using Table 2 to calculate reference premiums for each age range, with results shown in Table 3.

Consumer payments for benchmark coverage

Estimating the PTC requires subtracting from the reference premiums shown in Table 3 the amounts that BHP-eligible consumers would pay for marketplace benchmark coverage, which vary based on FPL and household size. Table 4 shows those income-based amounts for households up to 5 people in size.8

Note: Calculations are based on FPL levels for 2014 for all states except Alaska and Hawaii, which will be in effect at the start of 2015 open enrollment.

As explained above, consumer payments, within each FPL range for each household size, are calculated based on averages, assuming that each FPL percentage is equally represented in the range. Table 5 shows those averages.9 Note that the same amounts would be paid for benchmark coverage in all states but Hawaii and Alaska, so Tables 4 and 5 can be used by analysts in any of the other 48 states and the District of Columbia.10

Note: Calculations are based on FPL levels for 2014 for all states except Alaska and Hawaii, which will be in effect at the start of 2015 open enrollment. Calculations for BHP consumers under 138% FPL assume even distribution by FPL percentage. If actual distribution between those within federally specified ranges (0-50, 51-100, and 101-138% FPL) is significantly different from the assumed distribution, average payments required for consumers under 138% FPL could differ from those shown.

PTC estimates, without considering tax reconciliation effects

The above analyses allow a calculation of PTC amounts, without considering tax reconciliation effects. The simplest case involves a household with one BHP-eligible member. Such a household’s PTC is determined by subtracting the required payment for benchmark coverage, given the applicable FPL level and household size, as shown in Table 5, from the reference premium for the applicable age range, as shown in Table 3. Table 6 displays the results, by FPL level and household size.

For households with more than one BHP-eligible member, the calculation is more complex. This issue requires careful attention; it is often mishandled in estimating federal BHP payments. In Washington and almost all other states, family premiums are calculated by adding up the premiums charged to each enrollee within the family.11 The family’s required payment for benchmark coverage, however, is unaffected by the number of family members who receive such coverage. For purposes of estimating federal BHP payments per BHP-eligible consumer, the payment amount required from the entire family is divided among the BHP-eligible members of the family.

To illustrate, in a 4-person household between 139-150% FPL, the required household payment for benchmark coverage is $106.30. If that household has one BHP-eligible member in the 45-54 age range, the reference premium is $425.23. The PTC amount is the difference between the two numbers, or $318.93 (Table 6). If that household has two BHP-eligible members in the 45-54 age range, each is charged the $425.23 reference premium, but they “split” the household’s required payment of $106.30. Each therefore receives a PTC of $372.08, calculated by subtracting $53.15 from $425.23.12 Tables 7 and 8 show PTC amounts for individual consumers within households that have two and three BHP-eligible members. The calculations divide household income-based payments by 2 and 3, respectively, to determine individual (rather than household) PTC amounts.

Calculating the PTC component of federal BHP payments

To calculate the PTC component of federal BHP payments, the above PTC amounts are multiplied by .9492, reflecting the impact of tax reconciliation, according to the federal payment methodology for 2015; and .95, which converts the marketplace PTC into the federal BHP payment. The amounts in Tables 6 through 8 are multiplied by .90174, the product of these two factors. The results are shown in Table 9.

Cost-Sharing Reduction Component

CSR component before adjusting for tobacco use

Estimating the CSR’s value for an individual consumer begins by calculating the amount of the consumer’s expected EHB claims. As noted earlier, the total amount of EHB claims, without including those related to tobacco use, is determined by making the following adjustments to the reference premium for non-smokers:

Multiplying the reference premium by 0.8, to eliminate administrative costs;

Dividing it by 0.7, to add consumers’ share of EHB claims; and

Multiplying it by 1.12, to account for induced utilization resulting from lower out-of-pocket cost-sharing.

Combining these three factors means that the reference premium is multiplied by 1.28 to estimate the amount of EHB claims (other than those resulting from tobacco use). The value of the CSR, for consumers at or below 150% FPL, is the increase in AV resulting from the CSR, which equals 24% of EHB claims costs; for those between 151 and 200% of FPL, that increase equals 17%. The resulting value of the CSR in the marketplace is then multiplied by 95%, to calculate the CSR component of the federal BHP payment. Table 10 shows these calculations.

Table 10. Calculating the CSR component of the federal BHP payment, without the tobacco adjustment: 2015

Age range

Reference premium

EHB claims

CSR value in marketplace

CSR component of BHP payment

0-150% FPL

151-200% FPL

0-150% FPL

151-200% FPL

19-20

$153.19

$196.08

$47.06

$33.33

$44.71

$31.67

21-34

$261.43

$334.63

$80.31

$56.89

$76.30

$54.04

31-44

$310.18

$397.03

$95.29

$67.50

$90.52

$64.12

45-54

$425.23

$544.29

$130.63

$92.53

$124.10

$87.90

55-64

$639.31

$818.32

$196.40

$139.11

$186.58

$132.16

The tobacco adjustment

The tobacco adjustment is calculated based on two factors: the extent to which EHB claims for tobacco use are not included in the premium charged to non-smokers, which is estimated based on the weighted-average ratio of benchmark premiums for tobacco users to benchmark premiums charged to non-tobacco users; and the estimated prevalence of tobacco use among BHP enrollees.

For tobacco users age 21 and older, all but one of Washington’s benchmark QHPs increase premiums by 7.5% above the rates charged to non-users.13 The other QHP increases such premiums by 20%.14 The latter plan is the benchmark QHP in counties with 41% of the state’s QHP enrollees.15 Weighting these tobacco-based premium increases by QHP enrollment, we find that, for the weighted-average tobacco user age 21-64 in Washington State, premiums rise by 12.6% because of tobacco use. Under the federal payment methodology, this is the measure of EHB tobacco-related claims that are not included in the reference premium charged to non-users.

According to data from the Centers for Disease Control and Prevention (CDC), 17.5% of all Washington adults smoked and 3.6 percent used smokeless tobacco in 2012, totaling 20.1 percent tobacco users. These percentages varied greatly by age, as shown in Table 11.

Table 11. Percentage of Washington residents who use tobacco, by age: 2012

Age range

Percent of residents who use tobacco

Cigarettes

Smokeless Tobacco

Total

18-24

15.8%

4.1%

19.9%

25-44

22.9%

5.7%

20.0%

45-64

17.6%

2.4%

8.7%

65+

7.5%

1.2%

28.6%

Source: Office on Smoking and Health, National Center for Chronic Disease Prevention and Health Promotion, 2013.16

By multiplying the 12.6% weighted average increase in health care costs resulting from tobacco use by the estimated rate of tobacco use among Washington residents within various age ranges, as shown in Table 11,, we calculate the percentages by which CSR payments should increase to reflect tobacco-related EHB claims that are not included in premiums charged to non-smokers. The percentage increases that apply within the age ranges used by the CDC are set out in Table 12.

While that calculation shows the generally applicable methodology, in Washington state no tobacco adjustment applies to BHP enrollees under age 21, because QHPs do not raise premiums for tobacco users under age 21.

As the final step in calculating the CSR component, we increase the CSR component of federal BHP payment amounts, shown in Table 10, by the percentages shown in Table 13 (except for adults under age 21, whose CSRs are not adjusted based on tobacco use). The result is shown in Table 14.

Federal payment cells

Table 15 combines the PTC components shown in Table 9 with the CSR components shown in Table 14. The combination represents the approximate average federal payment for all BHP-eligible Washington residents who share the displayed combination of household size, FPL, age, and number of BHP-eligible consumers per household. Unlike the dollar amounts shown above, those in the following table are stated in annual terms.

Step Three: Calculate the average federal payment for BHP-eligible residents

Multiplying the number of BHP-eligible consumers in each category, shown in appendix table A4 for Washington State, by the federal payment per capita for each applicable statewide federal payment cell, as shown in Table 15, yields the federal payment totals shown in Table 16. For all BHP-eligible consumers statewide, these payments sum to $190.0 million. When we divide that total by the estimated 43,520 BHP-eligible state residents shown in the Appendix tables for Washington State, we find that federal payments for BHP-eligible state residents average approximately $4,366 for 2015.

Obviously, not all BHP-eligible consumers will enroll. But to the extent that eligible consumers of all types—income, age, household size, etc.—are equally likely to sign up, the average federal payment per enrollee will approximate the amount for all eligible consumers.

These estimates also allow a calculation of average federal payments for various subsets of BHP-eligible consumers, such as all consumers within particular age and FPL ranges. One can simply divide total federal payments for each subset by the number of included consumers. For example, Table 17 shows that:

2015 BHP payments in Washington State rise with age. They average $1,483 for BHP-eligible consumers age 19-20; 2,889 for those age 21-34; $3,421 for those age 35-44; $4,993 for those age 45-54; and $7,841 for those age 55-64. This pattern results from higher marketplace premiums (hence higher QHP subsidies, all else equal) for older adults.

Within each individual age band, federal BHP payments are highest for the poorest consumers. For example, among adults age 19-20, federal payments average $2,015 for BHP-eligibles consumers at 0-138% FPL; $1,589 at 139-150% FPL; $1,216 at 151-175% FPL; and $860 at 176-200% FPL. This reflects higher marketplace subsidies (hence higher federal payments) for lower-income consumers.

However, when one combines BHP-eligible consumers of all ages, the lowest average federal payments are for those with incomes below 138% FPL, because consumers in this group are poor immigrants disproportionately likely to be young adults. Above 138% FPL, federal payments are highest for those with the lowest income, even if one includes eligible consumers of all ages. Payments average $5,042 at 139-150% FPL, declining to $4,435 at 151-175% FPL and $4,132 at 176 to 200% FPL.

These sub-set averages can help state-level policymakers and stakeholders compare federal payments to health care costs that vary based on age (and income, if benefits and out-of-pocket cost-sharing differ based on BHP enrollees’ income). Such averages can also help policymakers craft BHP rules that promote financial feasibility by encouraging the enrollment of eligible consumers with the most favorable fiscal relationship between federal funding amounts and average health care costs.

Table 17. Average federal payments per BHP-eligible consumer, for various combinations of age and FPL: statewide estimates, 2015